Diamond Circle Capital Fund

Two critical diamond industry events have thus far passed under the radar of mainstream media. They deserve an airing here as they signal a shift to open-access, transparent, and globalised diamond trading – a far cry from the industry’s heritage in tight handshake-based relationships.

First: The creation of a $400m Diamond Circle Capital Fund, an investment fund which will invest in $1m+ high end diamond. The fund is the brainchild of commodity asset management specialist Diapason.

Second: The development of a diamond futures market by industry ‘wild child’ Martin Rappaport, based on ‘bread and butter’ brilliant diamonds – high quality rounds between 1.01 and 1.19 carats. The classic engagement ring ingredient.

Both measures aim to address fundamental weaknesses in the existing diamond trade: while consumer demand is solid (if not exactly strong) and extraction capacity is solid (if not exactly strong), the centre of the diamond pipeline is in deep trouble. The distribution arteries of the industry are clogged. Rough dealers, manufacturers and polished wholesalers are finding it hard to breathe. Both stock and debt levels are at record highs.

It’s the first move – the investment fund – that I want to address first.
According to industry commentator Chaim Evan-Zohar, these measures should attract much-needed external capital into the industry, and will enable manufacturers to shift goods which would otherwise get stuck in the distribution, or shifted on at a bargain rate; they need deep pockets to hold onto.

There are dozens of good diamond manufacturers who will not even try to compete for the truly large rough stones, because they cannot be sure that they have the right connections. The Diamond Circle Capital fund significantly widens opportunities for the trade to sell large polished stones.

As De Beers’s historic monopoly passes into history, a period of uncertainty emerged in which the industry needs new pathways to get goods to consumers.

After a long period in the dodrums, Chinese and Indian demand is on the rise for smaller goods, and oligarchs increasingly need something shiny to please their soon-to-be-ex-wives. The is now some hope that the industry may finally be emerging from its doldrums. This hope, and desparation at the status quo is encouraging a new wave of innovation.

Both these new measures rely upon the fact that diamonds can be traded as commodities. By picking narrowly defined segments – one highly volatile and one highly stable, the measures will introduce powerful, albeit potentially conflicting price signals into an opaque marketplace.

But the question is, who will this benefit. Does it really help manufacturers? Does it really help consumers? Critically, will it help investors?

For manufacturers there may well be be a one-time injection of funds as they sell difficult to shift of stock to the Diamond Circle fund, but thereafter, it’s unlikely the fund will have the sales capability to shift much stock. If it does, the potential for misleading transactions is immense. On the one hand it promises to set a benchmark by disclosing genuine sales figures rather than tax-cogniscent guesstimates. On the other hand, the integrity of these transactions will be very difficult to assure. What liquidity is there really in a rolling stock of 100 or 200 diamonds?

The proposed participants are actually rich rough dealers with little sales experience.
As one of the world’s leading retailers of large stone said to me:

Selling large diamonds is an art form, making the buyer feel like a queen. Manufacturers should stay well away.

Building on his observation, it’s not the business of a fund, or even, really, of an auction house to sell these diamonds. It’s quite possible that the fund may actually act to suppress value rather than enhance it.

Secondly, the fund is likely to have a disproportionate number of difficult to sell or ugly diamonds – if a dealer has a really quality large diamond he is likely to be able to find a more value-adding route for it.

The third point is that not all diamonds have value. Period. Some are just not saleable, at any price. Although the aggregation created by the fund is likely to smoothe out the risks of holding these diamonds, on average it will probably overvalue the diamonds it contains.

To conclude, and to challenge Chaim’s view, the simple truth is diamonds are NOT commodities. Treating them as such will not inflate value, it will only erode it…

The sooner the industry finds a way to step back from this abyss, the sooner it may regain a luxury premium.

I will comment on Martin Rappaport’s futures market in due course…wait for part II…